You make your products with the best of intentions. You work hard to provide consumers with newer, better, higher quality products. What happens when a problem arises with a product that is already on the market? Products that malfunction or pose a danger to consumers can be a very real threat to any company.
For most manufacturers, product recalls are taboo even in casual conversation. Yet if you are in business long enough, it is likely that you will face at least one product recall. Will your recall be a bump in the road or a fatal accident for your company?
Smart Business spoke with Karen Burns, assurance partner at Sensiba San Filippo LLP, to learn how to manage product recalls, mitigating immediate financial losses while preserving the brand of the organization.
What financial exposures can result from a product recall?
There are many direct costs associated with a recall, such as shipping, storing, replacing or destroying defective products. Expenses for managing public relations can add up quickly as well.
Beyond direct expenses, other less obvious costs can loom even larger. Business interruption and lost profits are often the greatest cost of a product recall. Product liability from products that cause bodily harm to consumers or damage to property can also increase risk exponentially.
Finally, don’t overlook potential damage to your reputation and loss of brand equity. Product recalls aren’t simple or inexpensive, but costs and potential risks can be managed with proper planning.
What pre-emptive strategies can help manage risk and financial exposure?
There are three strategies that companies use to manage recall risk: reduce it, assume it or transfer it.
Reducing risk involves taking strategic actions to avoid recalls and the costs that come with them. Creating a ‘culture of quality’ that spans your entire business and supply chain can reduce the occurrence of recalls, while establishing crisis-management procedures can help you minimize the effects of any recalls that do occur.
Companies may choose to assume the risk of a product recall by carrying high insurance deductibles or self-insuring. This strategy is best utilized only by very large companies because the cost of a single recall could be catastrophic for mid-cap and small companies.
Finally, transferring risk is a good idea for any organization. Suppliers and insurers can help you recover the cost of a recall. Before a recall event occurs, ensure that you are carrying the right kind and amount of insurance. Obtain coverage for all the risks you may face during a recall. Multiple insurance policies may be applicable. Additionally, insist that key suppliers carry product recall insurance, including third party coverage.
How should companies strategically approach a recall?
It is important when facing a recall to be proactive and to act quickly. Don’t wait for your hand to be forced. Voluntary recalls are easier to manage and generally less costly than mandatory recalls. By being proactive, you can better control the situation and the conversation surrounding it.
Take a long-term view of the situation. Don’t try to cover-up a problem. Communicate honestly. Consumers are more forgiving when you acknowledge a problem quickly and take corrective action.
Don’t underestimate the time, effort and expense required. Place your financial survival and the protection of your brand at the top of your priority list.
Finally, don’t try to tackle the problem alone. You will need legal, insurance and financial assistance to get through a recall. Your lenders and investors may have to bear some of the financial burden, and your CPA can help steer those conversations.
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